If you use the Internet to sell goods or products to customers in Connecticut, you should learn about Connecticut’s Internet sales tax rules. Those rules have been a subject of debate in Connecticut, as in many other states and at the federal level. More particularly, in April 2011, Connecticut enacted a new law that applies to large out-of-state Internet retailers.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
Below is an article on the current rules on Internet sales tax in Connecticut. The new federal law is scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
The General Rule: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
For more specific guidance on how physical presence is defined specifically under Connecticut’s law, refer to the definition of “engaged in business in the state” in Section 12-407(15)(A) of Connecticut’s sales and use tax law. (Note: some of the latest amendments to Connecticut’s sales tax law are not incorporated in the preceding linked document, which is from 2011. For the latest updates, you will need to run a search using the state’s statutes database.)
As you might expect, the corollary to the physical-presence rule is that if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state. This is implied in guidance published by Connecticut Department of Revenue Services (DRS), which indicates that if a “business does not have any physical presence in Connecticut,” registering to collect tax is voluntary.
Be aware that Connecticut has a relatively new state law applicable to out-of-state Internet retailers that presents an exception to these general rules.
The following examples generally would be valid in situations where special rules, such as those enacted in Connecticut in 2011, do not apply.
Example 1: You are operating solely out of a store in Jonesboro, Arkansas and make a sale to a customer in Stamford, Connecticut—a state where your business has no physical presence: You are not required to collect sales tax from the Stamford customer.
Example 2: You are operating solely out of an office in Bridgeport, Connecticut and make a sale to a customer in Hartford, Connecticut: You are required to collect sales tax from the Springdale customer.
Example 3: After several years of operating solely out of a store in Jonesboro, Arkansas, you open a one-room satellite office just outside of New Haven, Connecticut—a state where previously you had no physical presence. A day later, you make a sale to a customer in Hartford, Connecticut: You are required to collect sales tax from the Hartford customer.
Some items sold via the Internet to Connecticut customers may be exempt from sales tax under Connecticut law. For example, under Section 12-412(102) of the sales tax law, bicycle helmets are exempt from sales tax. The DRS has a helpful, readable webpage listing many of the most important items exempt from state sales tax.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” According to guidance from the DRS, “Common purchases that are subject to use tax would be supplies or equipment purchased by Internet or mail order sales since the vendor is rarely required to collect sales tax.”
Connecticut’s “Amazon Law”
In the Spring of 2011, the Connecticut legislature amended the definition of “retailer” in Section 12-407(12) of the state’s sales tax statute, adding language to require larger Internet retailers with no physical presence in Connecticut, but meeting certain other conditions, to collect and pay Connecticut’s sales tax. Similar laws have been at least considered, and sometimes enacted, in various states around the country. These laws are commonly known as “Amazon laws.” (As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states, and therefore, under the default sales tax rule, need not collect sales tax from customers in those states. As customers in those states often do not pay the corresponding use tax, Amazon’s sales, and those of other large online retailers, such as Overstock.com, are frequently understood to constitute significant lost tax revenue for those states.)
Under the new law, if an out-of-state Internet retailer has what is commonly known as a “click-through” arrangement with one or more persons located in Connecticut, and meets a few other conditions, the retailer must collect sales tax. More specifically, an out-of-state retailer needs to collect sales tax from Connecticut customers if that retailer:
- has an agreement with one or more persons in Connecticut to refer potential customers to the retailer via a website link or otherwise
- compensates the person or persons in Connecticut for directing potential buyers to the online dealer, and
- the seller’s “cumulative gross receipts” from such directed sales to Connecticut customers exceeds $2,000 during the preceding 12 months.
As a result of Connecticut passing this law, Amazon.com shut down all click-through arrangements with people located in Connecticut.
For most small online businesses, it is the long-established “physical presence” rule that provides primary guidance on collecting tax on sales to customers in Connecticut. However, the issue is contentious, as demonstrated by the Amazon law enacted in Connecticut last year.
A good place to turn for additional information about a Connecticut’s Internet sales tax laws is the Department of Revenue Services. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.